"The International dimension of the harmonization of accounting standards in the EU"

Abstract

Starting in January 2005, all companies located in the European Union (EU) have to use the accounting standards promulgated by the International Accounting Standards Board (IASB). At a stroke, accounting standards for the consolidated accounts of companies whose shares are listed on an EU stock exchange have been harmonized across the Union. This is quite an achievement. Although IASB standards have existed for more than 30 years, this is the first time that they will become directly and solely applicable within a state, let alone 25 states. This situation raises two interesting questions. Why are accounting standards being harmonized now? Why are the IASB’s standards being adopted as opposed to other accounting standards (American, British or European)? The answer to the first question is best found in neofunctionalism’s concept of functional spillover, whereby the integration of capital markets in the EU requires common financial reporting standards. The answer to the second question is best dealt with by liberal intergovernmentalism, whereby the decision to standardize accounting standards across the EU is the ultimate responsibility of the member state governments, whose preferences are determined by domestic politics. However, in the present case, and this is the novel contribution of this paper, it is the external (i.e. international) environment that shapes member states’ domestic politics. The globalization of capital markets as a result of the international mobility of capital structures member state governments’ preferences vis-à-vis making IASB standards applicable throughout the EU. To have a complete understanding of the EU’s policymaking choice regarding accounting standards and possibly other areas of European integration and policy-making, EU scholars need to incorporate (some might bring back) the external environment in their analytical toolbox. The paper also provides support for more recent theoretical approaches to the EU, notably delegation and multi-level governance, by showing that a recent decision by the European Commission to Europeanize somewhat the IASB’s standards may undermine (continental) member states’ ultimate goal of restoring the competitiveness of their capital markets in the global economy. Finally, this paper adds to the emerging literature on the international political economy of standard setting by offering a case study in support of recently proposed theoretical approaches to the topic.